

	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	4,321		$	1,747		$	4,455
State	565			176			190
Foreign	1,481			1,031			389
Total current tax expense	6,367			2,954			5,034
Deferred:
Federal	(39		)	316			(296		)
State	19			34			(33		)
Foreign	(20		)	(55		)	(45		)
Total deferred tax (benefits)/expense	(40		)	295			(374		)
Provision for income taxes	$	6,327		$	3,249		$	4,660



	Year Ended December 31,
	2019		2018		2017
U.S. federal statutory income tax rate	21.0	%	21.0	%	35.0	%
State income taxes, net of federal benefit	1.8		0.7		0.6
Research tax credits	(0.8	)	(1.0	)	(0.9	)
Share-based compensation	4.5		0.3		0.4
Excess tax benefits related to share-based compensation	(0.7	)	(2.6	)	(5.8	)
Effect of non-U.S. operations	(5.8	)	(5.9	)	(18.6	)
Effect of U.S. tax law change ⁽¹⁾	—		—		11.0
Non-deductible FTC settlement accrual	4.5		—		—
Other	1.0		0.3		0.9
Effective tax rate	25.5	%	12.8	%	22.6	%

(1) Due to the 2017 Tax Cuts and Jobs Act, provisional one-time mandatory transition tax on accumulated foreign earnings was accrued as of December 31, 2017. In addition, deferred taxes were derecognized for previous estimated tax liabilities that would arise upon repatriation of a portion of these earnings in the foreign jurisdictions.



	December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforward	$	2,051		$	1,825
Tax credit carryforward	1,333			668
Share-based compensation	135			270
Accrued expenses and other liabilities	798			487
Lease liabilities	1,999			—
Other	149			153
Total deferred tax assets	6,465			3,403
Less: valuation allowance	(1,012		)	(600		)
Deferred tax assets, net of valuation allowance	5,453			2,803

Deferred tax liabilities:
Depreciation and amortization	(2,387		)	(1,401		)
Right-of-use assets	(1,910		)	—
Purchased intangible assets	—			(195		)
Total deferred tax liabilities	(4,297		)	(1,596		)
Net deferred tax assets	$	1,156		$	1,207

The valuation allowance was approximately $1.01 billion and $600 million as of December 31, 2019 and 2018, respectively, mostly relating to U.S. state tax credit carryforwards and U.S. foreign tax credits for which we do not believe a tax benefit is more likely than not to be realized.

As of December 31, 2019, the U.S. federal and state net operating loss carryforwards were $9.06 billion and $2.37 billion, which will begin to expire in 2033 and 2027, respectively, if not utilized. We have federal tax credit carryforwards of $357 million, which will begin to expire in 2029, if not utilized, and state tax credit carryforwards of $2.28 billion, most of which do not expire.

Utilization of our net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change of greater than 50% over a three‑year period.

The 2017 Tax Cuts and Jobs Act (Tax Act) imposed a mandatory transition tax on accumulated foreign earnings and generally eliminated U.S. taxes on foreign subsidiary distribution. As a result, accumulated earnings in foreign jurisdictions are available for distribution to the U.S. without incremental U.S. taxes.



	Year Ended December 31,
	2019			2018			2017
Gross unrecognized tax benefits ‑ beginning of period	$	4,678		$	3,870		$	3,309
Increases related to prior year tax positions	2,309			457			72
Decreases related to prior year tax positions	(525		)	(396		)	(34		)
Increases related to current year tax positions	1,402			831			536
Decreases related to settlements of prior year tax positions	(1		)	(84		)	(13		)
Gross unrecognized tax benefits ‑ end of period	$	7,863		$	4,678		$	3,870

During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of income. The amount of interest and penalties accrued as of December 31, 2019 and 2018 were $747 million and $340 million, respectively.

On July 27, 2015, the United States Tax Court issued a decision (Tax Court Decision) in Altera Corp. v. Commissioner, which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Decision was appealed by the Commissioner to the Ninth Circuit Court of Appeals (Ninth Circuit). On June 7, 2019, the Ninth Circuit issued an opinion (Altera Ninth Circuit Opinion) that reversed the Tax Court Decision. Based on the Altera Ninth Circuit Opinion, we recorded a cumulative income tax expense of $1.11 billion in the second quarter of 2019. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit and the request was denied on November 12, 2019. The taxpayer has until February 10, 2020 to request a hearing before the Supreme Court of the United States. As a result, the final outcome of the case is uncertain. In November 2019, we made a $1.64 billion payment related to this matter and recorded the payment to net against the related tax liability included within other liabilities in our consolidated balance sheets. If the Altera Ninth Circuit Opinion is reversed, we would anticipate recording an income tax benefit at that time.

We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2014 through 2016 tax years and by the Ireland tax authorities for our 2012 through 2015 tax years. Our 2017 and subsequent tax years remain open to examination by the IRS. Our 2016 and subsequent tax years remain open to examination in Ireland.

In July 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS stated that it will also apply its position for tax years subsequent to 2010. We do not agree with the position of the IRS and have filed a petition in the Tax Court challenging the Notice. The case is scheduled for trial beginning in February 2020. On January 15, 2020, the IRS filed its Pretrial Memorandum in the case stating that it planned to assert at trial an adjustment that is higher than the adjustment stated in the Notice. The IRS did not provide any information about how it intends to apply the revised adjustment to future years. Based on the information provided, we believe that, if the IRS prevails in its updated position, this could result in an additional federal tax liability of an estimated, aggregate amount of up to approximately $9.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted.

In March 2018, we received a second Notice from the IRS in conjunction with the examination of our 2011 through 2013 tax years. The IRS applied its position from the 2010 tax year to each of these years and also proposed new adjustments related to other transfer pricing with our foreign subsidiaries and certain tax credits that we claimed. If the IRS prevails in its position for these new adjustments, this could result in an additional federal tax liability of up to approximately $680 million in excess of the amounts in our originally filed U.S. returns, plus interest and any penalties asserted. We do not agree with the positions of the IRS in the second Notice and have filed a petition in the Tax Court challenging the second Notice.

its Pretrial Memorandum. In addition, if the IRS prevails in its positions related to transfer pricing with our foreign subsidiaries, the additional tax that we would owe would be partially offset by a reduction in the tax that we owe under the mandatory transition tax on accumulated foreign earnings from the Tax Act. As of December 31, 2019, we have not resolved these matters and proceedings continue in the Tax Court.

We believe that adequate amounts have been reserved in accordance with ASC 740 for any adjustments to the provision for income taxes or other tax items that may ultimately result from these examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the taxing authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, and cash flows.